The line originated with a desire for a rail route north of Douglas along the east coast of the island, following the establishment of railways to the south and west and the north via the west. As early as the 1870s, schemes were being prepared for a line from Douglas to Laxey but early attempts did not progress.

In 1892, The Howstrake Estate Act included the construction of a 3 foot gauge tramway "to be worked by animal, steam, electric or other power". Alexander Bruce, who was involved in an ambitious project to develop the Howstrake estate from 1889 had become attracted to the idea of an electric railway running north from Douglas. A two and a half mile Douglas to Groudle section was planned and this opened to public traffic on 7th September 1893. The initial stock comprised 3 motor saloon cars and six open trailers.

Before the initial line was opened, the Douglas & Laxey Coast Electric Tramway Ltd was formed to take over operation and extend it northwards to Laxey. The Douglas & Laxey Coast Electric Tramway changed its name to "IOM Tramways & Electric Power Co. Ltd." from the 30th of March 1894 and the Laxey extension opened on 28th July 1894.

The Douglas & Laxey Tramway (extension to Ramsey) Act was passed on the 13th of May 1897 and construction began in the autumn. The last link into the centre of Ramsey opened on the 24th of July 1899.

The IOMTEPCo went in to liquidation in July 1900. The new Manx Electric Railway Company took over from the receiver on the 18th of August 1902.

On the 1st of June 1957, the Manx Electric Railway was formally handed over by the company to Isle of Man Government ownership.